Mailbag

June 4, 2011

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Dead Horses

To the Editor: Why does Barron's continue to beat a dead horse by blaming Fannie Mae and Freddie Mac for the mortgage meltdown, as in Gene Epstein's "Worthies Worth Blaming, and a Way Ahead" (Economic Beat, May 23)?

As Gretchen Morgenson maintains in her new book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, there is enough blame to go around both the private and public sectors.

As a mortgage banker and broker of 30 years, I haven't underwritten or brokered a single loan guaranteed by Fannie and Freddie that wasn't subject to its gold-standard underwriting criteria, emulated by everyone else in the mortgage industry who wishes to maintain its historical foreclosure rate of slightly more than 1% and a default rate of 4%-plus, versus the 8% rate of conventional and "nontraditional" mortgages in general, as just brought out in the Mortgage Bankers Association First-Quarter Delinquency Survey.

A viable mortgage market really doesn't have to be government-guaranteed to function effectively. But we would need regulations that required mortgage originators to adhere to Fannie and Freddie's gold-standard underwriting guidelines, which require not only income and asset verification, but some evidence that the ability to support the terms of a mortgage can be maintained. Harlan Green Santa Barbara, Calif.

Gene Epstein responds: The horse isn't dead. The "gold standard" of these government-sponsored enterprises got severely debased, as witness their staggering $164 billion taxpayer bailout, a figure likely to climb even higher. But as my article stated, Fannie and Freddie did not account for all of the 70% of high-risk mortgages attributable to the federal government by mid-2008. In fact, more than one-third of that 70% was accounted for by other federal programs, including the Community Reinvestment Act. And as my article also made clear, crony capitalists like Angelo Mozilo bear some of the blame, as does the Federal Reserve's nearly four years of negative interest rates, begun in 2002. But if Harlan Green blames the institutions of free-market capitalism for the debacle, he is tragically mistaken.

High-Frequency Fraud

To the Editor: As described in "Next Danger: 'Splash Crash'," by Jim McTague (May 23), it's ludicrous to expect Securities and Exchange Commission lawyers to understand the dangers of high-frequency trading. After all, the SEC couldn't even stop Bernie Madoff's massive but simple fraud.

The vocational training known as law school doesn't remotely prepare lawyers to cope with technological innovation and advanced mathematics misapplied to ripping off stock investors in high-frequency trading. Lawyers look backward to precedent. Innovators look forward and assiduously avoid precedent. The two mindsets are antithetical.

That has great benefit on Main Street, and to our society as a whole, as it allows new businesses to create entirely new things without being killed at birth by politicians who want to tax them, bureaucrats who want to regulate them, lawyers who want to sue them and unions that want to extort money from them. But high-frequency trading actually is front-running on steroids. Just because it can be done doesn't mean it should be allowed. Fred Charette Las Vegas

Hidden Jewel

To the Editor: I'm glad that Susan Neider recovered the $10,000 she paid for the incorrectly evaluated alexandrite ring she purchased last year ("False Promise," May 23). But from an investment perspective, one thing bothers me. A synthetic alexandrite, such as the one that Neider almost got stuck with, has the same composition and crystal structure as a natural gem, and may possess superior clarity and color. Yet, after three laboratory evaluations, and I'm sure, several weeks of anxiety, it is judged to be worth 1/10th or 1/50th the price that a naturally occurring alexandrite gem might command. For ordinary investors such as me, this seems to make investing in high-end gemstones much too risky. It's like asking some Bernie Madoff wannabe to manage my retirement portfolio. I'll stick to stocks, bonds and funds. When one of these investments turns out to be a stinker, a few keystrokes on my computer, or a quick check of the Barron's Market Week section is all the proof I need. I don't have to consult a trio of well-paid experts, and do some post-purchase research, to learn that I've been hosed. David Mazzaferro Waterbury, Conn.

To the Editor: If a gem expert gets taken in by a fake gem, what is the point of buying natural gems? Susan Neider should provide a list of the labs that can produce these stones, especially if the companies are publicly traded. They sound like real gems to me.| Dan Fitzsimmons Apple Valley, Minn.

Delusions of Reality

To the Editor: The Federal Reserve's Ben Bernanke is like an engineer who fails to properly define system scope. While the models and simulations appear robust, real-world application leads to seemingly inexplicable failure. What Bernanke has failed to account for are the resources and circumstances out of his control.

The coming crash in U.S. financial markets will be triggered by failures overseas. Investors will suddenly realize that the appropriate risk premium for even top-tier assets is far higher than what they had previously believed. J. Eftin Frenett Spencerport, N.Y.

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